We’ve come a long way since the wild pre-crisis days, but the battle to make banks safer and conduct better is not yet won. Our first line of attack? The 1st line of defence

I am delighted to be given the opportunity to write the foreword to 1LoD’s annual benchmarking survey and report. The following pages constitute a thorough examination of some of the principal themes in the front office control function at the moment, and this kind of frank discussion can only benefit our industry.

If we look back over the last decade, it becomes clear that the period before the financial crisis was characterised by very light touch regulation, an increased use of technology within the business that, for example, allowed complex derivative products to be provided, and a culture that had lost sight of the fact that banks were in business to serve customers. These factors, together with lax controls, led to the crisis.

A lot of progress has been made since that period to make banks safer through bolstering liquidity and capital levels, and as a result of debate around understanding conduct obligations. These factors – not to mention the fact that banks have been subjected to some very large fines – have established new norms in the industry. Certainly banks have spent vast amounts of money on their control functions.

We can do better
We can feel to some degree comforted by what has been achieved but we cannot afford to be complacent nor to underestimate what still needs to be done. A brief glance at the newspapers will tell us we are still seeing major scandals a decade after the financial crisis. It would be both foolish and naïve to draw any other conclusion than that the job remains incomplete.

Banks need to build stronger and more robust governance for the management of non-financial risk, but also to inculcate a culture that prizes doing the right business in the right way.

With regard to the former, I’m glad to see that most major banks have instituted a 3LOD model over the past few years, and it has made an undeniable contribution to the better controls generally now in place. It needs to be remembered that just because the front office faces clients and generates revenue, it is not exempt from doing business in the right way. In fact, 99.9% of potential problems should be caught by the 1st line of defence. The 2nd and 3rd lines are mainly there to check the work of the 1st line and to make sure that it is doing what it should.

It is also the job of the 1st line to ensure that the business model is viable for all parties concerned and that the bank is fulfilling its legal and regulatory requirements. These are issues for the employees that are closest to the provision of products to customers and are responsible for the management of those relationships.

It’s on you
Moreover, it is in the self-interest of people in the front office to get this right for they will bear the most acute consequences if they get it wrong. It is absolutely imperative that the 1st line is working correctly and efficiently, and then the 2nd and 3rd lines can do their job.

It is also important that the 1st line builds the right processes to support the right behaviours. This includes hiring, promotion and compensation. I am sure many of us have come across the star trader whose business practices might be a bit dubious but who makes a lot of money for the bank and is therefore compensated handsomely. The more that stays the same, the more the industry stays in this perilous position.

Such traders often argue that it’s a competitive business and they have to cut corners because their competitors are doing it. My answer to them is this: let the competition do it. They will pay the price sooner or later. Your responsibility is to do business that is right for the customer and is sustainable.

Rally the troops
Of course, it’s very important to leverage technology as well, but people underestimate the human element. It’s vital to create a culture where people feel safe to turn down business if it isn’t right for the customer and also one in which they feel safe to raise concerns to management.

A cursory study of history and human natures suggests that 2008 will not be the last financial crisis the world experiences and we should remember that the consequences of any future crisis will likely be at least as severe as the last.

If we are to minimise such future consequences, we must accept that while much has been accomplished there remains much to do within the 1st line. This work is critical for the future prosperity of banks, their customers and society as a whole, and I encourage you all to continue your intense focus upon this work.

Welcome to 1LoD's Global Benchmarking Survey and Annual Report 2019, the largest and most comprehensive survey ever conducted on the front office control sector. This year's report was answered by over 30 of the world’s largest financial institutions. We hope you enjoy reading the findings and thank you to everyone who contributed to making it a success. To find out more about upcoming events, our careers hub or other content from 1LoD just visit www.1lod.com